Cash and Corporate Control

ABSTRACT

The takeover market is often suggested as appropriate for containing the agency problems of excessive corporate cash holdings.
However, recent studies report contradictory evidence. I focus on the takeover‐deterrence effects of corporate liquidity and
suggest the proxy contest as an effective alternative control mechanism. I find that proxy fight targets hold 23% more cash
than comparable firms, and that the probability of a contest is significantly increasing in excess cash holdings. Proxy fight
announcement return also is positively related to excess cash. Following a contest, executive turnover and special cash distributions
to shareholders increase, while cash holdings significantly decline.